The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that BeiGene, Ltd. ( NASDAQ:BGNE ) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
What Is BeiGene's Debt?
The image below, which you can click on for greater detail, shows that at June 2019 BeiGene had debt of US$247.6m, up from US$209.8m in one year. However, it does have US$1.54b in cash offsetting this, leading to net cash of US$1.29b.
A Look At BeiGene's Liabilities
The latest balance sheet data shows that BeiGene had liabilities of US$271.7m due within a year, and liabilities of US$307.4m falling due after that. On the other hand, it had cash of US$1.54b and US$61.5m worth of receivables due within a year. So it actually has US$1.02b more liquid assets than total liabilities.
This surplus suggests that BeiGene has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, BeiGene boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if BeiGene can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts .
Over 12 months, BeiGene reported revenue of US$434m, which is a gain of 34%. With any luck the company will be able to grow its way to profitability.
So How Risky Is BeiGene?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months BeiGene lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$747m and booked a US$665m accounting loss. But at least it has US$1.5b on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, BeiGene may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting BeiGene insider transactions .
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet .
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